Internal Control Deficiencies Early Warning Model Research

In 2002, with the issuing of Sarbanes-Oxley Act, more attention is paid to internal control information especially internal control deficiencies information all over the world. In 2013, COSO revise internal control framework, internal control five elements refined into 17 principles and 77 focus. The research about internal control will become the home and abroad scholars’focus. In recent years, China Securities Supervision Department also attaches great importance to building internal control guidelines. Five ministries not only enacted Basic Norms of Enterprise Internal Control which requires listed companies disclose internal control annul self-evaluation report and internal control audit report in 2008, but also enacted Enterprise Internal Control Supporting Guidelines and made the timetable for the implementation of the Basic Norms of Enterprise Internal Control in 2010.China would implement internal control standard year by year in 2011,2012 and 2013. In this paper, based on the theoretical analysis and compare of internal control deficiencies identifying all over the word, we will build internal control deficiencies identifying framework system which is suitable for China. Then empirical analysis methods are used to build internal control deficiencies early warning model. The model can be used as an effective tool to judge whether exist important deficiencies or major deficiencies, and make internal control deficiencies identifying more operable.Firstly, internal control deficiencies identifying standards are compared and analysed in American, England and China. Then based on the analysis of relevant theory, the internal control deficiencies information is helpful to alleviate the principal-agent problem, reduce the information asymmetry and produce the effect of signal transmission. Secondly,17 principles in 2013 COSO internal control integrated framework is imitated to build internal control deficiencies identifying framework system which is suitable for this paper. Thirdly, based on identifying framework system, we will select the 2011 Shanghai and Shenzhen A-shares listed companies as study sample. Then based on related methods of financial early warning model, internal control deficiencies early warning model will build according to the analysis of the internal control deficiencies influence factors. Through typical case analysis of 10 listed companies, we will verify the accuracy of internal control deficiencies of the early warning model.The results of warning model shows:the internal control deficiencies early warning indicators include the degree of internal control deficiencies description, the number of internal control deficiencies, net profit margin on sales, asset-liability ratio, rate of inventory turnover, the rate of accounts receivable turnover. At the same time, with their use of logistic regression model warning effect is slightly better than the probability regression model. The accuracy of internal control deficiencies of the early warning model is 80%. Internal control deficiencies warning model can be used in the supervision of internal control and investment decision of outside investors. Finally, according to the results of empirical analysis, this paper puts forward some proposal to complete our country listed company internal control deficiencies identifying standards system:China Securities Supervision Department speed up the promotion and enforcement of internal control system specification, at the same time, strengthen the supervision of internal control deficiencies and improvement.